IAI Actuarial Core Principles · Business Economics · Supply-side policies and their impact on businesses
An economy has a rigid labour market. The government introduces reforms that make hiring and firing easier for firms, while also expanding a retraining programme. Which statement most accurately describes the likely effects and trade-offs?
Easier hiring and firing plus retraining should make firms more willing to hire and cut structural unemployment, but workers may face greater insecurity and the benefits may be unevenly shared. Outcomes are not guaranteed in the short run, and mobility lowers rather than raises the natural rate.
- AFirms' flexibility and willingness to hire may increase and structural unemployment may fall, but workers may face greater job insecurity and the gains may be unequally spreadCorrect
- BUnemployment will definitely fall in the short run with no cost to workers
- CAggregate demand will rise because job security improves consumer confidence
- DLabour costs for firms will necessarily rise because of retraining levies
- The natural rate of unemployment will rise because of greater labour mobility
Explanation
Flexible labour rules reduce the risk of hiring and retraining improves matching, which tends to lower structural unemployment. The trade-offs are job insecurity and uneven distribution of gains. Greater mobility typically lowers, not raises, the natural rate, and short-run effects are not guaranteed.
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